Internal Control Questionnaires and Verification Procedures

Pipeline, Warehouse, and Hedging — Control Systems

1. Are risk limits reasonable and supported by documented analysis?

2. Does a formal process exist for granting exceptions to policies and limits?

3. Are detailed MIS reports produced on pipeline, warehouse, and hedging activities?

4. Do adequate fallout reports exist?

5. Are loans awaiting sale segregated from loans held in the permanent mortgage portfolio?

6. Are warehouse reconciliation reports produced?

7. Are inventory turnover and aging reports generated?

8. Are procedures in place that ensure warehouse loans are accurately reflected on the bank’s Report of Condition?

9. Are pipeline commitments and warehouse loans accounted for at the lower of cost or market (LOCOM)?

10. Do the hedge products used minimize the bank’s exposure to interest rate risk?

11. Are hedging strategies supported by correlation analysis when basis risk exists?

12. Is simulation modeling used to quantify risk? If so, are assumptions documented?

13. Are profit/loss reports generated for all mortgage banking hedging activities?

14. Does management back-test the effectiveness of hedging activities?

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